Rate of Unemployed Starting Businesses Hits 25-Year Low

The likely culprits? Lending is tight--and hiring levels are just strong enough.

The number of unemployed individuals starting their own businesses is at a 25-year low, according to new research.

Chicago-based outplacement consulting firm Challenger, Gray & Christmas said the rate of unemployed managers and executives launching start-ups dropped to 2.5 percent in the second quarter of 2011, the lowest rate since the firm began tracking the statistic in 1986. (The decade's high? The second quarter of 2005, when 13.1 percent of jobless took the entrepreneurship plunge.)

Challenger, Gray & Christmas's quarterly survey of 3,000 job seekers includes "all career levels," but the survey pool "tends to skew" towards unemployed former managers and executives, the company said.

Through the first six months of 2011, an average of 3.3 percent of job seekers decided to start their own businesses, according to the report. That was down from the previous record low: 3.7 percent in the first two quarters of 2010.

In the second quarter of 2011, the start-up rate dipped even lower, to just 2.5 percent of job seekers. The Labor Department says those defined as self-employed has fallen from 9 million in July 2009 to 8.6 million currently, a drop of 4.4 percent.

The biggest obstacle to starting up: Getting the cash, suggests the report.

"Lending is still extremely tight and for many of those wanting to start a business, funding the venture with credit cards or through a home equity loan are no longer viable options," said John Challenger, the company's CEO.

He added: “Another reason start-up activity may be falling is that hiring is improving just enough to keep people on a more traditional employment path.”

Thanks to continued layoffs and retirements, net employment gains are tiny, though Challenger said actual hiring levels are strong. Employers hired nearly 12.2 million new workers during the second quarter, says the Bureau of Labor Statistics, though 12 million left jobs during that three-month period.

"When the recovery reaches the point when employers begin hiring, but the economy remains relatively fragile, we tend to see a drop in entrepreneurism as job seekers start to see success in their searches," Challenger said. "As the economy continues to gain strength, start-up activity may begin to grow again, as conditions for such ventures become more inviting."